ADJUSTMENTS

RECORDING BUSINESS TRANSACTIONS

Agenda for today
01 Cash Basis Versus Accrual Basis

02 Deferrals

03 Accruals

04 Other Adjustments
ACCOUNTING CYCLE

CASH BASIS ACCRUAL BASIS

We recognized income only We recognized income when the service has
when it is collected been performed or the product has been de-
livered

Debit Cash XXXXX Debit Accounts Receivable XXXXX

Credit Revenue XXXXX Credit Revenue XXXXX

We recognized expense only We recognized expense only when it is in-

when it is paid curred, usually in the form of bills receive

Debit Expense XXXXX Debit Expense XXXXX

Credit Cash XXXXX Credit Payable XXXXX
ACCOUNTING CYCLE

CASH BASIS ACCRUAL BASIS

Used for tax purposes Complies with standards (IFRS, PFRS, GAAP)

Records both cash and non-cash transac-

Records only cash transactions tions
DEFERRALS
DEFERRALS – is the postponement of the
recognition of an expense already paid but
not yet incurred or of revenue already col-
lected but not yet earned.

There are two sides in a deferral. You must

always know who are you in the problem. Are
you the one who paid or the one who col-
lected.
If you are the one who pays – treatment is
record it initially as an asset (prepaid exp)
and transferred to expense during the expira-
tion or when incurred (asset method when
the problem is silent)

If you are the one who collected – treatment

is record it initially as a liability (unearned
revenue) and transferred to income when
service had been performed or product had
been delivered (liability method)
X paid Y, Php 24,000 for two years rent in advance on Feb 1, 2023. You are the accountant of X. If
the reporting date is Jun 30, 2023. How will you record the adjustment?

Asset Method Expense Method

Feb 1 Prepaid Rent 24,000 Feb 1 Rent Expense 24,000
Cash 24,000 Cash 24,000
2-yr (24 mo) paid = 24,000 (24,000/24) Using the expense method, you need to identify
1 mo paid = 1,000 how much are only incurred and not incurred. The
Payment Date: Feb 1 incurred should only be the Expense while those
Reporting Date: Jun 30 not yet incurred should go to Prepaid Asset
Month asset is incurred: 5 mo
Payment Date – Reporting Date = 5,000 (5mo x 1,000)
Adjusting amount: 5 x 1,000 = 5,000
Rent Expense should only be 5,000, hence over ex-
pense of 19,000
Jun 30 Rent Expense 5,000 Jun 30 Prepaid Rent 19,000
Prepaid Rent 5,000 Rent Expense 19,000
Quiz No.1
Joe acquired a five year policy insurance for Php 720,000 on Jun 30, 2023. He is using fiscal
year ending in Sep 30, 2023. What will be the initial entry when he pay the insurance and the ad -
justing entry using the asset method?

Jun 30 Prepaid Insurance 720,000 5-yr (60 mo) paid = 720,000 (720,000/60)
Cash 720,000 1 mo paid = 12,000
Payment Date: Jun 30
Reporting Date: Sep 30
Sep 30 Insurance Expense 36,000 Month asset is incurred: 3 mo
Prepaid Insurance 36,000 Adjusting amount: 3 x 12,000 = 36,000

What if Joe is using the expense method? How will you record the initial entry and the adjusting
entry?
Jun 30 Insurance Expense 720,000
Cash 720,000

Sep 30 Prepaid Insurance 684,000

Insurance Expense 684,000
If you have purchased Php 164,000 of Supplies on Jan 1, 2022 and you have 98,000 on hand dur -
ing year-end. What will be the adjusting entry?

SUPPLIES
Supplies is a special type of prepayments. In this case, you just subtract how many
were on hand from the total purchased. The difference is the amount of used supplies
and should be recorded as supplies expense.

Purchased : 164,000
On-hand : 98,000
Used 66,000

Dec 31 Supplies Expense 66,000

Supplies 66,000
Y received Php 180,000 for three years rent in advance on Feb 1, 2023 from X. You are the ac -
countant of Y. If the reporting date is Jun 30, 2023. How will you record the adjustment?

Liability Method Income Method

Feb 1 Cash 180,000 Feb 1 Cash 180,000

Unearned Rent 180,000 Rent Revenue 180,000

Using the income method, you need to identify

3-yr (36 mo) received = 180,000 (180,000/36)
1 mo received = 5,000
Collection Date: Feb 1
Reporting Date: Jun 30
Month liability is earned : 5 mo
Adjusting amount: 5 x 5,000 = 25,000
how much are only earned and not earned. The
earned portion should only be the income/revenue
while those not yet earned should go to Unearned
Revenue
Collection Date – Reporting Date = 25,000 (5mo x
5,000)
Rent should only be 25,000, hence over income of
155,000

Jun 30 Unearned Rent 25,000 Jun 30 Rent Revenue 155,000

Revenue 25,000 Unearned Rent 155,000
Quiz No.2
V collected Php 900,000 for a one year service on Aug 15, 2023. What will be the initial entry
when he receive the cash and the adjusting entry using the liability method on reporting date
Oct 31, 2023?

Aug 15 Cash 900,000 1-yr (12 mo) paid = 900,000 (900,000/12)

Unearned Revenue 900,000 1 mo paid = 75,000
Collection Date: Aug 15
Reporting Date: Oct 31
Oct 31 Unearned Revenue 187,500 Month asset is incurred: 2.5 mo
Revenue 187,500 Adjusting amount: 2.5 x 75,000 = 187,500

What if V is using the income method? How will you record the initial entry and the adjusting en -
try?
Aug 15 Cash 900,000
Revenue 900,000

Oct 31 Revenue 712,500

Unearned Revenue 712,500
 ACCRUALS
ACCRUALS – is the recognition of an ex-
pense already incurred but not yet paid or of
revenue already earned but not yet collected.

There are two sides in a an accrual. You must

always know who are you in the problem.
Are you the one who performed the service or
the one who incurred the expense.
If you are the one who performed the service
– treatment is to record a receivable and an
income

If you are the one who incurred the expense –

treatment is to record an expense and a
payable
X was hired and performed service for three days for P 5,000 per day on Feb 1

Feb 1 Accounts Receivable 15,000

Revenue 15,000

On Jun 30, A received bills from Meralco worth

3,000; unpaid contractor bill who repairs the air-
condition for 2,500 and an employee had per-
formed service for her for 4 days for Php 500 per
day.

Jun 30 Utilities Expense 3,000

Repairs Expense 2,500
Salaries Expense 2,000
Accrued Liabilities 7,500

Jun 30 Utilities Expense 3,000

Accrued Utilities 3,000
Repairs Expense 2,500
Accrued Repairs 2,500
Salaries Expense 2,000
Accrued Salaries 2,000
 X received a 90 day note from Y, 10% Php 100,000 on Feb 1, 2022. The reporting date is Mar 3,
2023. How will you record the adjustment

Feb 1 Notes Receivable 100,000

Cash 100,000

Period: 90 days
Let’s compute first the interest for the 90
day note.
I=PxRxT
I = 100,000 x 0.10 x 90/360
I = 2,500 (interest for 90 days)

Commencement Date: Feb 1

Reporting Date: Mar 3
Interest to accrue : 30 days
Adjusting amount: I x 30/90 = 2,500 x 30/90
= 833.33

Mar 3 Interest Receivable 833.33

Interest Revenue 833.33
Quiz No.3 Answer Problem No.3 Page 213

Dec 31 A/R 600,000

Royalty Income 600,000
Jan – Jun 2020 – to be paid in Nov 2020 1,000,000
May 1 Cash 600,000
Jul – Dec 2020 – to be paid in May 2021 2,250,000
A/R 600,000
Total Royalty Income/Royalty Expense 3,250,000
Jun 30 A/R 1,000,000
Royalty Income 1,000,000

Nov 1 Cash 1,000,000

Jul – Dec Sales is 15,000,000 A/R 1,000,000
Jul – Dec Sales: 15,000,000 x 0.15 = 2,250,000.00
Dec 31 A/R 2,250,000
Royalty Income 2,250,000
Quiz No.4 Answer Problem No.4 Page 214

P = 600,000 Cash 600,000

1. 0 interest expense paid since interest will
R = 8% Note Pay
be paid at maturity date on 2021
Period: 6 mo 600,000
Let’s compute first the interest for the 6 mo.
I=PxRxT 2. Interest expense for 2020 is 16,000
I = 600,000 x 0.08 x 6/12
I = 24,000 (interest for 6 mo/180 days) 3. Total Liabilities on 2020:
Notes Payable – 600,000
2020 Interest Payable - 16,000
Commencement Date: Sep 1 Total Payable =616,000
Reporting Date: Dec 31
4. Total cash paid
Interest to accrue : 4 mo
Principal payment =600,000
Adjusting amount: I x 4/6 = 24,000 x 4/6
Interest payment 2020 = 16,000
= 16,000
Int Exp 16,000 Interest payment 2021 = 8,000
Int Pay 16,000 Total payment = 624,000
2021
Total Interest 24,000
2020 Interest - 16,000 Int Exp 8,000 5. Interest Expense for 2021 = 8,000.00
2021 Interest 8,000 Int Pay 8,000
OTHERS
Bad Debts – used for any loans or outstand-
ing balances that a business deems uncol-
lectible. Usually it is based on percentage of
sales
Ex. ABC identified that 3% of their current
sales are uncollectible. 2022 sales – Php
3,500,000.
Hence 3,500,000 x 0.03 = 105,000
Bad Debts Expense 3,500,000
Allowance for Bad Debt 3,500,000
Amortization – a reduction in the value of in-
tangible asset. Same with depreciation.
Ex. Z acquires a patent for 2,000,000 to be
amortized over 50 years. Using calendar
method, what should be the entry at year-
end?
Amortization Expense 40,000
Patent 40,000
Depreciation - a reduction in the value of an
asset with the passage of time, due in particu-
lar to wear and tear
Ex. H Co. have fixed asset worth 1,500,000 as
purchase price. The useful life of this asset is
5 years and the salvage value is 500,000. How
much will be the depreciation if it was ac-
quired on Jan 1 and reporting date is on Dec
31?
Depreciation = (Historical Cost – Salvage value)
useful life
= (1,500,000-500,000)/5
= 200,000 for a year
Since the needed is from Jan – Dec, the Php 200,000
is the adjusting amount. If the needed is less than
one year, we need to divide the Php 200,000 by 12
and multiply on how many months to depreciate.
Depreciation Expense 200,000
Accumulated Dep - FA 200,000
Quiz No.5